27 May 1998 Internal T.I. 9731957 - WRONGFUL DISMISSAL DAMAGES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

What portion of the amounts paid in settlement of an employment termination dispute are taxable and how?

Position:

We recommend that the amounts in question be assessed as follows:

a. Loss of salary (XXXXXXXXXX months notice) paid as a settlement for wrongful dismissal be treated as a retiring allowance.

b. Any amount received as pre-judgment interest be treated as a tax free receipt while any amount received as post judgment interest be taxed as interest.

c General damages be treated as a retiring allowance.

d. Party and Party costs be included in income and be set off to the extent of available deductions

Reasons:

Paragraph 9 of IT-337R3 sets out our position on the treatment of the award of damages for wrongful dismissal. This position is also applicable to negotiated settlements of wrongful dismissal cases. Amount (a) above is a retiring allowance in accordance with this position. General damages (c) is also subject to these comments. General damages are not taxable where there is sufficient evidence to conclude they are for personal injury, such as a human rights violation. However, the material provided in this case did not contain sufficient evidence to make this conclusion. Prejudgment interest is not taxable in accordance with the position of the Department taken in 1985. This position was recently confirmed by the Policy and Legislation Technical Sub Committee.

		May 27, 1998

Ottawa Tax Services Office Headquarters
H. Beaulac, Interim Director W.C. Harding
( 613) 957-8953
Attention: Peter Murphy
973195

XXXXXXXXXX
Determination of Retiring Allowance

This is in reply to your facsimile of December 3, 1997, in which you asked us to review comments you previously made with respect to the above issue in view of representations received by your office from XXXXXXXXXX representative.

With respect to the comments pertaining to the payment of damages in the settlement of a wrongful dismissal case, the Department’s position on this matter is now stated in paragraph 9 of IT-337 R3 dated January 30, 1998. This paragraph clarifies that the Department will treat court-awarded damages in a wrongful dismissal case as retiring allowances where the award is made in respect of lost wages and benefits and the employee has lost his or her employment.

The Bulletin also clarifies that payments made to an employee as general damages in connection with a loss or termination of employment will normally be treated as retiring allowances. However, if sufficient details support a position that a human rights violation or personal injury unrelated to the loss of an office or employment has occurred , it may be appropriate to apportion the amount paid on a reasonable basis with part being a retiring allowance and part being a tax free award. In the situation you are considering, we are not convinced that this would be the case based on the statements provided by XXXXXXXXXX representative. You may wish to refer to Bedard v. MNR, (91 DTC 573) as an example of the amount of detail needed to support a position that an amount of damages is tax free.

Legal costs awarded are discussed at paragraph 10 of the bulletin.

For a number of years the Department has extended the position with respect to the taxation of presettlement interest received in respect of an award for personal injury or death, as set out in paragraph 4 of IT 365R2, to the treatment of prejudgement and presettlement interest received in respect of damages for wrongful dismissal. This position has recently been under review by the Department. However, we can now confirm that the position expressed in paragraph 4 of the bulletin will continue to be applied to damages for wrongful dismissal. Accordingly, prejudgment interest received in respect of damage awards for wrongful dismissal will continue to be excluded from income while post judgment interest on such awards will continue to be taxable as interest.

In summary, in the matter at hand, based on the information submitted, we recommend that

a. $XXXXXXXXXX (being the amount paid in respect of XXXXXXXXXX loss of salary) be treated as a retiring allowance;

b. $XXXXXXXXXX (being interest from XXXXXXXXXX ) be treated as a non taxable receipt to the extent it represents presettlement interest;

c. $XXXXXXXXXX (being an award of general damages) be treated as a retiring allowance; and

d. $XXXXXXXXXX (being party and party costs) be treated as described in your letter of November 20,1997.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch